A Publicly Traded Venture Capital Company Investing in Tiny Technology

SIX MONTHS' REPORT 2002

FELLOW SHAREHOLDERS:

The year to date has been a time of fast-paced, substantial progress for your Company.

• During this period, we committed the Company for the first time to making all of our new investments in a single area: tiny technology, including nanotechnology, microsystems and microelectromechanical systems (MEMS). We chose this focus because we believe that important new technological developments for years to come will increasingly be enabled by tiny technology. We also chose this focus because tiny technology is not a single industry, but rather sets of enabling technologies underlying a wide variety of products for a wide variety of end users. Thus, we can retain our traditional insistence on maintaining a reasonable degree of diversification – an insistence that heretofore had precluded our focusing our investment activity on a single industry – while focusing our new investment activity exclusively on tiny technology.

• During this period, we invested in six tiny-technology enabled companies (we had previously invested, in August of 2001, in another tiny-tech company, Nantero, Inc., a privately held spinoff of Harvard University developing memory devices using carbon nanotubes). Our 2002 tiny-tech investments include: Nanopharma Corp., a privately held Massachusetts General Hospital spinoff founded to develop advanced drug delivery systems; NanoOpto Corporation, a privately held company that is applying proprietary nano-optics and nano-manufacturing technology to design and make components for optical networking; NeoPhotonics Corporation, a privately held company that is developing patented technology that enables the manufacture of unique nanoscale optical compositions for the telecommunications industry; Nanotechnologies, Inc., a privately held company that is developing and producing a wide variety of high-performance nanomaterials for government and industry; Optiva, Inc., a privately held company that is developing and commercializing a new class of nanomaterials for advanced optical applications, initially for the flat panel display industry; and Continuum Photonics, Inc., a privately held company developing a family of unique and value-added optical networking subsystems based on smart materials, microfabrication and control electronics that will enhance the flexibility and reliability of optical networks.

· During this period, we had a successful transferable rights offering of our shares, in which we sold 2,634,614 shares of our stock, or approximately 90 percent of the shares offered, at $2.25 per share, for net proceeds of $5,751,155 after estimated expenses of $176,726. Prior to our decision to focus on tiny technology, we had not been trying to grow the Company's capital by retaining all of our after-tax capital gains and by raising new capital. Rather, we had been paying out to shareholders much of our capital gains, through cash dividends and repurchases of our stock. The rights offering was initially filed on April 26 and completed as scheduled on July 26, which happened to coincide with the very worst period of this bear market. When originally filed, the subscription price for the new shares, $2.25, was not only at a 14 percent discount to the then-most recently calculated net asset value of $2.63, but also at a 45 percent discount to the then-current closing stock price on April 25 of $4.10. We intended that shareholders who did not choose to exercise their rights could nevertheless realize significant value for their rights by selling them. Unfortunately, in the context of the stock market collapse, our stock price also came down during the three months between the filing date and the completion date, even though the Company's net asset value per share as of June 30 increased to $2.68. Thus, regrettably, most of the rights that shareholders elected to sell could not be sold at high enough prices to yield substantial proceeds. Nevertheless, given the market conditions and the fact that we used no underwriter or paid sales agents for the rights offering, in order to minimize expenses and maximize the percentage of the subscribing shareholders' money that would actually go to the Company, the fact that 90 percent of the rights were subscribed can only be interpreted as a success. Certainly, this response to the rights offering is strong testimony to our shareholders' desire to put money to work through the Company in tiny-technology enabled investments.

Ironically, the worsening of the bear market in 2002 has greatly benefited our Company and its long-term prospects. We do not believe that it would have been possible for us to have accomplished nearly as much in such a short time in a bull market. We believe that our ability to invest on attractive terms in selected tiny-technology enabled companies – companies addressing large markets, with proprietary technology and good managements – has been greatly enhanced by the bear market. Meanwhile, as a result of the rights offering, the cash distributed by our 20-percent owned money management firm, PHZ Capital Partners, and the liquidation of one of our earlier, non-tiny tech investments, Informio, our cash and equivalents net of indebtedness have actually increased slightly during the year, from $13,449,085 on December 31, 2001 to $13,867,399 currently – in spite of operating expenses and the torrid pace at which we have been investing in tiny technology. Highly qualified people are also more available in this economic environment, and we have been steadily interviewing candidates for our professional staff. To date, we have extended an offer to one, Douglas W. Jamison, who will join us on September 9 as a vice-president from his previous position with the University of Utah Technology Transfer Office. We also welcome two new directors to our Board, Kelly S. Kirkpatrick and Lori D. Pressman.

One day the venture-capital bear market will end. When it does, we plan to have a portfolio of leading tiny-technology enabled companies that are attractive candidates for initial public offerings or acquisition and to have built Harris & Harris Group into a significant venture-capital franchise specializing in tiny technology.

We are very mindful that the great progress that we have made in the year to date towards building our franchise and our portfolio of leading tiny-technology enabled companies was possible only with your support as fellow shareholders. You have never demonstrated that support more strongly than you did when you made the rights offering a success during a period in which few other public equity offerings were completed. We thank you.

Charles E. Harris

Chairman and Chief Executive Officer

Mel P. Melsheimer

President and Chief Operating Officer

August 23, 2002

This letter may contain statements of a forward-looking nature relating to future events. Statements contained in this letter that are forward looking statements are intended to be made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. These statements reflect the Company's current beliefs, and a number of important factors could cause actual results to differ materially from those expressed in this letter. Please see the Company's Annual Report on Form 10-K and recent Prospectus filed with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the Company’s business, including but not limited to the risks and uncertainties associated with venture capital investing and other significant factors that could affect the Company's actual results. Except as otherwise required by Federal securities laws, Harris & Harris Group, Inc. undertakes no obligation to update or revise these forward looking statements to reflect new events or uncertainties.

Unaudited Schedule of Investments* (As of June 30, 2002)
	Shares/Principal	Value
Investment
AlphaSimplex Group, LLC	--	$4,087
Continuum Photonics, Inc.
Series B Convertible Preferred Stock	2,000,000	$1,000,000
Experion Systems, Inc.
Series A Convertible Preferred Stock	187,500
Series B Convertible Preferred Stock	22,500	$600,000
Exponential Business Development
Limited partnership interest	--	$25,000
Kriton Medical, Inc.
Series B Convertible Preferred Stock	476,191	$1,000,001
NanoOpto Corporation
Series A-1 Convertible Preferred Stock	267,857	$625,000
Nanopharma Corp.	684,516	$700,000
Nanotechnologies, Inc.
Series B Convertible Preferred Stock	1,538,837	$750,000
Nantero, Inc.
Series A Convertible Preferred Stock	345,070	$489,999
NeoPhotonics Corporation
Series D Convertible Preferred Stock	1,498,802	$1,000,000
NeuroMetrix, Inc.
Series A Convertible Preferred Stock	875,000
Series B Convertible Preferred Stock	625,000
Series C-2 Convertible Preferred Stock	1,148,100
Series E Convertible Preferred Stock	266,665	$6,708,225
Optiva, Inc
Series C Convertible Preferred Stock	454,545	$500,000
PHZ Capital Partners L.P.
Limited partnership interest	--	$3,492,547
Questech Corporation
Common Stock	646,954
Warrants at $5.00 expiring 11/15/04	1,965
Warrants at $1.50 expiring 11/16/05	1,250	$724,588
Schwoo, Inc.
Series B Convertible Preferred Stock	2,306,194
Convertible Bridge Loans	$360,250
Series B Convertible Preferred Warrants	934,985	$ 0
Total		$17,619,447

*Selected quarterly financial information. The information contained herein does not include the full unaudited quarterly financial information. Please see the Company's report on Form 10Q for the quarter ended June 30, 2002 for the unaudited financial information and notes thereto.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES*
ASSETS
	June 30, 2002	December 31, 2001
	(Unaudited)	(Audited)
Cash, U.S. Government Obligations and cash equivalents	$  8,209,978	$25,944,862
Investments, at value	17,619,447	13,120,978
Restricted funds	654,839	482,020
Interest receivable	0	82
Note receivable ($6,987, net of reserve of $6,987 at 6/30/02)	0	10,487
Prepaid expenses	51,269	14,833
Other assets	282,875	109,105
Total assets	$26,818,408	$39,682,367
LIABILITIES & NET ASSETS
Accounts payable and accrued liabilities	$  1,332,815	$  1,039,350
Bank loan payable	0	12,495,777
Accrued profit sharing	427,567	178,282
Deferred rent	10,023	14,650
Current income tax (receivable) liability	(35,728)	255,068
Deferred income tax liability	1,351,606	1,364,470
Total liabilities	3,086,283	15,347,597
Commitments and contingencies
Net assets	$23,732,125	$24,334,770
Net assets are comprised of:
Preferred stock, $0.10 par value, 2,000,000 shares authorized; none issued	$                0	$                0
Common stock, $0.01 par value, 25,000,000 shares authorized;     10,692,971 issued at 6/30/02 and 12/31/01	106,930	106,930
Additional paid in capital	27,228,748	27,228,748
Additional paid in capital - common stock warrants	109,641	109,641
Accumulated net realized gain (loss)	219,879	618,606
Accumulated unrealized appreciation of investments, net of deferred tax      liability of $1,540,044 at 6/30/02 and 12/31/01	(527,542)	(323,624)
Treasury stock at cost (1,828,740 shares at 6/30/02 and 12/31/01)	(3,405,531)	(3,405,531)
Net assets	$23,732,125	$24,334,770
Shares outstanding	8,864,231	8,864,231
Net asset value per outstanding share	$           2.68	$           2.75

CONSOLIDATED STATEMENTS OF OPERATION* (Unaudited)
	Three Months Ended		Six Months Ended
	June 30, 2002	June 30, 2001	June 30, 2002	<span lang=FR style='font-size: